IRS Extends 409A Transition Relief until December 31, 2008

Employee Benefits Alert

The IRS and Treasury issued Notice 2007-86 today, generally providing for an extension of the Section 409A transition relief until the end of 2008. This Notice affords a much more meaningful extension than the extension previously granted in Notice 2007-78, which was modified by today’s guidance. The terms of the new extension are summarized below.

Under Section 3.01 of the new Notice, employers are not required to comply with the requirements of the final regulations until 2009 and later. Instead, they are permitted to rely in the interim on the statute or other applicable guidance. Furthermore, under this extension, plans generally are not required to be amended until December 31, 2008, provided they are operated in compliance with the statute, the applicable provisions of Notice 2005-1, and other generally applicable guidance published with an effective date prior to January 1, 2008 (excluding the final regulations). The Notice effectively extends the reasonable, good-faith compliance standard described in Notice 2006-79 until the end of 2008 with respect to issues that are not addressed in Notice 2005-1 or other generally applicable guidance.

Notwithstanding the foregoing, the Notice states that for periods after December 31, 2007, and before January 1, 2009, while compliance with the final regulations will be deemed to meet the reasonable, good-faith standard, compliance with the proposed regulations will not meet such standard. Thus it appears that reliance on the proposed regulations generally is not permitted after 2007.

Today’s Notice also extends the transition relief for new payment elections to the end of 2008, subject to the blackout or “in-out” rule, which generally prohibits elections made in 2008 from applying to amounts otherwise payable in 2008 or from causing an amount payable in a later year to be paid in 2008.

The prior transition relief for linked plans is also generally extended by this Notice to the end of 2008, as is the special relief for substitutions of exempt stock rights for discounted stock options and SARs. The special rule that cut off transition relief with respect to the correction of certain discount stock options and SARs for insiders in publicly traded companies is not affected by the new guidance and is not extended beyond the 2006 deadline.

The Notice affords an extension until the end of 2008 of the relief granted for documenting certain initial deferral elections under Notice 2005-1, Q&A-21 (the so-called “March 15 election exception”), but also states that the relief granted with respect to initial deferral elections under programs established before April 10, 2007, in the second paragraph of Section XII.D of the final regulations preamble, is not further extended.

According to today’s Notice, the IRS and Treasury expect to issue guidance on the new Section 409A correction program very soon.

For further information, please contact any of the following lawyers:

Elizabeth Drake,, 202-626-5838

Fred Oliphant,, 202-626-5834

Anthony Provenzano,, 202-626-1463

Gary Quintiere,, 202-626-1491

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